Showing posts with label Africa. Show all posts
Showing posts with label Africa. Show all posts
Friday, February 06, 2015
Saturday, March 22, 2014
Saturday, December 07, 2013
The KPI Legacy of Nelson Mandela
Nelson Mandela passed away this week. He was one of the most revered statesmen the world has produced in my lifetime. His evolution from a radical activist to a master of reconciliation was remarkable. Historians will debate his legacy for years. I would like to explore one aspect of his legacy right now. His stewardship of South Africa's transition from an apartheid regime to full democracy should presumably have benefited South Africans of all races. We can measure the success of this transition with publicly available statistics on governance, economic conditions, and quality of life. These key performance indicators (KPIs) will show us South Africa's progress. Mr. Mandela was elected President of South Africa in 1994 and left office in 1999, so it makes sense to seek statistics for the period of his presidency and for the present day.
Transparency International tracks a Corruption Perception Index for every country in the world. In 1995, the earliest year for which the index is available, South Africa's score was 5.62 (out of 10) with a rank of 21st least corrupt country among those sampled (out of 41 countries). In 1999, South Africa's score was 5.0 (out of 10) with a rank of 34 (out of 99). In 2013, South Africa's score was 42 (out of 100) with a rank of 72 (out of 175). South Africa's corruption score thus slipped somewhat in absolute terms during President Mandela's term and continued to slide until the present day. The good news is that South Africa surpasses the median compared to other countries. It's worth noting that Transparency's scoring methodology has changed since the inauguration of the index and many more countries are now part of the survey.
The Heritage Foundation tracks an Index of Economic Freedom for every country in the world. I used the "explore the data" option to find South Africa's figures for 1995, the earliest year available. The country's overall score that year was 60.7 (out of 100), with no ranking available. Their score in 1999 was 63.3 and in 2013 it is 61.8. That's a slight improvement overall since the end of apartheid. South Africa today ranks 74th out of 177 countries, clearly beating the median and putting it in Heritage's "Moderately Free" category.
The World Bank tracks a Logistics Performance Index, one of my favorite measures of how well a country is positioned to handle trade. The earliest year for data is 2007 so we can't see any changes during Mr. Mandela's presidency. In 2007, South Africa scored 3.53 (out of 5) and ranked 24th (out of 150). In 2012, it scored 3.67 and ranked 23rd (out of 155). This statistic alone tells us little about whether Mr. Mandela made the country's infrastructure more robust but South Africa clearly ranks quite high.
The OECD maintains plenty of stats, including GDP, but the earliest data they have online is from 2007. GDP is a very relevant measure of an economy's health. We need stats from Mr. Mandela's era. This 2006 academic paper from the University of Stellenbosch demonstrates that South Africa did experience modest improvements in economic growth since 1994. CNN reports that South Africa has experienced enormous growth in its economy and middle class, even while severe inequality remains. Consider that economic benefits were primarily available only to the white minority before the end of apartheid. The salutary economic transformation since Mr. Mandela ended apartheid is praiseworthy.
The World Bank has additional data on South Africa from its World Development Indicators. GNI per capita has risen since 1994 but life expectancy and school enrollment have fallen. The UN Statistics Division data on South Africa shows strong economic growth since 2005; labor force participation has slightly declined; telephone and Internet use have skyrocketed.
This analysis is by no means an all-encompassing consideration of Mr. Mandela's effectiveness as a leader. I would argue that his most important achievement was the turnaround of an ostracized country. He rehabilitated what the business community would call a damaged brand and made it viable. South Africa earned inclusion among the BRICS nations as a dynamic emerging economy. Mr. Mandela took great care during his presidency to assure international investors that he would not nationalize South African industries or engage in wealth redistribution, and he held true to his word. Using Big Data KPIs shows clear progress in many areas. I would hire "Madiba" to save a troubled company.
Transparency International tracks a Corruption Perception Index for every country in the world. In 1995, the earliest year for which the index is available, South Africa's score was 5.62 (out of 10) with a rank of 21st least corrupt country among those sampled (out of 41 countries). In 1999, South Africa's score was 5.0 (out of 10) with a rank of 34 (out of 99). In 2013, South Africa's score was 42 (out of 100) with a rank of 72 (out of 175). South Africa's corruption score thus slipped somewhat in absolute terms during President Mandela's term and continued to slide until the present day. The good news is that South Africa surpasses the median compared to other countries. It's worth noting that Transparency's scoring methodology has changed since the inauguration of the index and many more countries are now part of the survey.
The Heritage Foundation tracks an Index of Economic Freedom for every country in the world. I used the "explore the data" option to find South Africa's figures for 1995, the earliest year available. The country's overall score that year was 60.7 (out of 100), with no ranking available. Their score in 1999 was 63.3 and in 2013 it is 61.8. That's a slight improvement overall since the end of apartheid. South Africa today ranks 74th out of 177 countries, clearly beating the median and putting it in Heritage's "Moderately Free" category.
The World Bank tracks a Logistics Performance Index, one of my favorite measures of how well a country is positioned to handle trade. The earliest year for data is 2007 so we can't see any changes during Mr. Mandela's presidency. In 2007, South Africa scored 3.53 (out of 5) and ranked 24th (out of 150). In 2012, it scored 3.67 and ranked 23rd (out of 155). This statistic alone tells us little about whether Mr. Mandela made the country's infrastructure more robust but South Africa clearly ranks quite high.
The OECD maintains plenty of stats, including GDP, but the earliest data they have online is from 2007. GDP is a very relevant measure of an economy's health. We need stats from Mr. Mandela's era. This 2006 academic paper from the University of Stellenbosch demonstrates that South Africa did experience modest improvements in economic growth since 1994. CNN reports that South Africa has experienced enormous growth in its economy and middle class, even while severe inequality remains. Consider that economic benefits were primarily available only to the white minority before the end of apartheid. The salutary economic transformation since Mr. Mandela ended apartheid is praiseworthy.
The World Bank has additional data on South Africa from its World Development Indicators. GNI per capita has risen since 1994 but life expectancy and school enrollment have fallen. The UN Statistics Division data on South Africa shows strong economic growth since 2005; labor force participation has slightly declined; telephone and Internet use have skyrocketed.
This analysis is by no means an all-encompassing consideration of Mr. Mandela's effectiveness as a leader. I would argue that his most important achievement was the turnaround of an ostracized country. He rehabilitated what the business community would call a damaged brand and made it viable. South Africa earned inclusion among the BRICS nations as a dynamic emerging economy. Mr. Mandela took great care during his presidency to assure international investors that he would not nationalize South African industries or engage in wealth redistribution, and he held true to his word. Using Big Data KPIs shows clear progress in many areas. I would hire "Madiba" to save a troubled company.
Thursday, July 04, 2013
Asanko Gold Used To Be Keegan Resources
Keegan Resources is now Asanko Gold. Name changes do not change the underlying fundamentals of a company. Asanko Gold used to trade as KGN.TO but now trades as AKG. It's still a gold explorer in Ghana, an African country that ranks 64th on Transparency International's Corruption Index (above the median) and 77th in the Heritage Foundation's Index of Economic Freedom (above the median). Ghana also ranks 108th on the World Bank's 2012 Logistics Performance Index. Noting country risk is always important when evaluating investments in emerging markets. Ghana is less corrupt and more stable than its peers but its infrastructure is still immature.
I had noted in my analysis of Cayden Resources last year that some of that company's management team also had responsibilities with Keegan. That is no longer the case with Asanko's present management. The Asanko team looks like they have a lot of experience with a variety of mining projects plus experience specific to Ghana.
The last time I checked on these folks when they were called Keegan, their Esaase project had MII resources. They now have a 43-101 pre-feasibility study dated June 2013 that shows 2P reserves of 1.41 g/t Au. That's not bad at all these days. Good work, folks. The PFS estimate for initial capex is US$286.5M with a total cash cost of production (I always ignore tax adjustments) of almost US$813/oz Au.
I like that their IRR estimated ranges at different market prices for gold have been fairly consistent at various stages of the Esaase project's development. Yes, I've been tracking them for some time and I kept their previous estimates for comparison. I'm concerned that the cash cost of production is significantly higher than gold's long-term average market price of US$615/oz. Gold prices will have to remain significantly higher for the ten-year life of this mine for it to maintain its projected production.
Asanko's most recent quarterly statement dated March 31, 2013 shows cash on hand of about US$197M. That is a phenomenal war chest but they will still need to raise more money to start production at Esaase. The good news is that they seem to manage their burn rate quite well, which increases their chance of surviving until they can find a larger partner to help fund full production.
I like Asanko but I'm not buying the stock just yet. I want to see whether a major producer finds the Esaase project attractive enough to make Asanko an offer they can't refuse.
Full disclosure: No position in Asanko Gold at this time.
I had noted in my analysis of Cayden Resources last year that some of that company's management team also had responsibilities with Keegan. That is no longer the case with Asanko's present management. The Asanko team looks like they have a lot of experience with a variety of mining projects plus experience specific to Ghana.
The last time I checked on these folks when they were called Keegan, their Esaase project had MII resources. They now have a 43-101 pre-feasibility study dated June 2013 that shows 2P reserves of 1.41 g/t Au. That's not bad at all these days. Good work, folks. The PFS estimate for initial capex is US$286.5M with a total cash cost of production (I always ignore tax adjustments) of almost US$813/oz Au.
I like that their IRR estimated ranges at different market prices for gold have been fairly consistent at various stages of the Esaase project's development. Yes, I've been tracking them for some time and I kept their previous estimates for comparison. I'm concerned that the cash cost of production is significantly higher than gold's long-term average market price of US$615/oz. Gold prices will have to remain significantly higher for the ten-year life of this mine for it to maintain its projected production.
Asanko's most recent quarterly statement dated March 31, 2013 shows cash on hand of about US$197M. That is a phenomenal war chest but they will still need to raise more money to start production at Esaase. The good news is that they seem to manage their burn rate quite well, which increases their chance of surviving until they can find a larger partner to help fund full production.
I like Asanko but I'm not buying the stock just yet. I want to see whether a major producer finds the Esaase project attractive enough to make Asanko an offer they can't refuse.
Full disclosure: No position in Asanko Gold at this time.
Wednesday, April 24, 2013
Silver Bull Resources (SVBL) and Silver in Mexico
Silver Bull Resources (SVBL) is digging for metals in Mexico and Gabon. It was known as Metalline Mining until May 2, 2011, yet I am puzzled that the old MMG ticker still exists. What the name change has to do with operating a mine is anybody's guess. Hard data and results are more relevant.
The CEO is a geologist. I tend to favor operating geologists over consulting geologists but a breadth of consulting experience in different geologies and metals helps. The rest of the team also has deep experience in the mining sector.
Their project in Sierra Mojada, Mexico is coming along. Their 43-101 data indicated fairly sizable Ag deposits with attractive grades, albeit still in MII categories. The photograph of the site in their corporate presentation shows several large flat areas adjacent to the projected mine that can accommodate milling facilities and tailings piles. The site also has a railroad connection, grid power, and water wells. That is truly the logistics trifecta.
It is significant that Couer D'Alene Mines Corp. owns a big piece of Silver Bull Resources. It is also significant that Silver Bull's Sierra Mojada project is in the general vicinity of Orko Silver's project. Coeur D'Alene completed its acquisition of Orko Silver this month. That puts one of the largest silver projects in Mexico into a producer's control. I do not believe Coeur D'Alene Mines is ready for another acquisition because they have to shell out CAD$100M to former Orko shareholders and had about US$125M on their balance sheet at the end of 2012. Silver Bull's current market cap is about US$54M, a bit of a stretch right now for Coeur D'Alene Mines unless they're willing to go into debt or commit the next several quarters of FCF exclusively to another acquisition (unlikely IMHO).
Their most recent quarterly report dated January 31, 2013 shows cash on hand of US$1.66M and a burn rate of about US$700K/month. Holy canole, they were running on fumes at the end of that quarter. These people needed to raise some cash pronto to have a chance at taking Sierra Mojada into production. Fortunately they did collect about $9.2M from a private placement in February. That's enough to last another year.
I'm going to wait for Silver Bull's PEA to see how much they think full development will cost. I also want to see another 43-101 report with 2P data. Acquisitions in the neighborhood are certainly encouraging because producers need to replace reserves reduced by production. Let's see if the stock moves once they announce a PEA.
Full disclosure: No position in SVBL (or other companies mentioned) at this time.
The CEO is a geologist. I tend to favor operating geologists over consulting geologists but a breadth of consulting experience in different geologies and metals helps. The rest of the team also has deep experience in the mining sector.
Their project in Sierra Mojada, Mexico is coming along. Their 43-101 data indicated fairly sizable Ag deposits with attractive grades, albeit still in MII categories. The photograph of the site in their corporate presentation shows several large flat areas adjacent to the projected mine that can accommodate milling facilities and tailings piles. The site also has a railroad connection, grid power, and water wells. That is truly the logistics trifecta.
It is significant that Couer D'Alene Mines Corp. owns a big piece of Silver Bull Resources. It is also significant that Silver Bull's Sierra Mojada project is in the general vicinity of Orko Silver's project. Coeur D'Alene completed its acquisition of Orko Silver this month. That puts one of the largest silver projects in Mexico into a producer's control. I do not believe Coeur D'Alene Mines is ready for another acquisition because they have to shell out CAD$100M to former Orko shareholders and had about US$125M on their balance sheet at the end of 2012. Silver Bull's current market cap is about US$54M, a bit of a stretch right now for Coeur D'Alene Mines unless they're willing to go into debt or commit the next several quarters of FCF exclusively to another acquisition (unlikely IMHO).
Their most recent quarterly report dated January 31, 2013 shows cash on hand of US$1.66M and a burn rate of about US$700K/month. Holy canole, they were running on fumes at the end of that quarter. These people needed to raise some cash pronto to have a chance at taking Sierra Mojada into production. Fortunately they did collect about $9.2M from a private placement in February. That's enough to last another year.
I'm going to wait for Silver Bull's PEA to see how much they think full development will cost. I also want to see another 43-101 report with 2P data. Acquisitions in the neighborhood are certainly encouraging because producers need to replace reserves reduced by production. Let's see if the stock moves once they announce a PEA.
Full disclosure: No position in SVBL (or other companies mentioned) at this time.
Monday, March 25, 2013
Financial Sarcasm Roundup for 03/25/13
I've been plenty sarcastic recently about life, business, and even the arts. Now it's time for my weekly official dose of sarcasm, in one full blast.
Cyprus sort of got its rescue deal. I say "sort of" because the real price it had to pay was the end of its competitive advantage as a haven for Russian hot money and multinational offshore banking. No self-respecting oligarch will ever again keep cash in a Cyprus bank. The troika is taking a big risk but has little choice. The ECB balance sheet has enough Cypriot debt to cause problems for its equity cushion if that island doesn't get a lifeline. The troika is out of ammo for now, so any further deals will be a gift to Gazprom and the Russian government (not that there's much difference between the two). One very important lesson policymakers learned is that any attempt to cram down deposits that are below the threshold of deposit insurance will trigger widespread popular resistance. Future cram-downs now have a template with a sequence of red lines to cross, each with a higher pain threshold than can now be modeled.
BP's stock buyback is not as encouraging as it seems. Any time a company buys back its own stock is a signal that it can't find new projects to generate an NPV high enough to cover its own cost of capital. Other supermajors are investing heavily in new projects in Africa and Southeast Asia, so where's BP drilling? It's also a risky move if BP is assessed a $17B contingent liability for the Macondo blowout. Making a slight adjustment to dividend policy would have been a cheaper way to send a friendly signal to shareholders.
China's new president is touring Africa to promote goodwill. If the West's multinational resource producers don't get on the ball, China will beat them to new resource discoveries in Africa. An old saying about the flag and trade alternately following each other applies here. Trading nations expand militarily to protect their trade interests. The OECD sees only the promise of China, not the threat. If East African nations grant basing rights to the Chinese military, the Indian Ocean will become contested for the first time in centuries and India will face strategic encirclement. Wake up, New Dehli, because you're about to be surrounded.
Bond market investors aren't worried at all now that Cyprus economy's ability to issue bonds has been devastated. Never before in recent memory have Fixed-income portfolio managers been so utterly stupid. They ought to see that this template will be applied in sequence to each of the PIIGS countries and them finally Northern Europe, yet they continue to talk their books. I'm really glad I don't own any European bonds right now or work with people who are dumb enough to do so. I'm also glad not to be downwind of whatever they're smoking.
Here's a hearty shout-out to my legion of new fans from concert halls and recital rooms across the nation. I'll have a lot more to say about alternatives to union strikes very soon. In the meantime, you musically-inclined folks need to go watch some old newsreels of labor unrest in the 1920s and '30s, just to know how lucky you are today.
Cyprus sort of got its rescue deal. I say "sort of" because the real price it had to pay was the end of its competitive advantage as a haven for Russian hot money and multinational offshore banking. No self-respecting oligarch will ever again keep cash in a Cyprus bank. The troika is taking a big risk but has little choice. The ECB balance sheet has enough Cypriot debt to cause problems for its equity cushion if that island doesn't get a lifeline. The troika is out of ammo for now, so any further deals will be a gift to Gazprom and the Russian government (not that there's much difference between the two). One very important lesson policymakers learned is that any attempt to cram down deposits that are below the threshold of deposit insurance will trigger widespread popular resistance. Future cram-downs now have a template with a sequence of red lines to cross, each with a higher pain threshold than can now be modeled.
BP's stock buyback is not as encouraging as it seems. Any time a company buys back its own stock is a signal that it can't find new projects to generate an NPV high enough to cover its own cost of capital. Other supermajors are investing heavily in new projects in Africa and Southeast Asia, so where's BP drilling? It's also a risky move if BP is assessed a $17B contingent liability for the Macondo blowout. Making a slight adjustment to dividend policy would have been a cheaper way to send a friendly signal to shareholders.
China's new president is touring Africa to promote goodwill. If the West's multinational resource producers don't get on the ball, China will beat them to new resource discoveries in Africa. An old saying about the flag and trade alternately following each other applies here. Trading nations expand militarily to protect their trade interests. The OECD sees only the promise of China, not the threat. If East African nations grant basing rights to the Chinese military, the Indian Ocean will become contested for the first time in centuries and India will face strategic encirclement. Wake up, New Dehli, because you're about to be surrounded.
Bond market investors aren't worried at all now that Cyprus economy's ability to issue bonds has been devastated. Never before in recent memory have Fixed-income portfolio managers been so utterly stupid. They ought to see that this template will be applied in sequence to each of the PIIGS countries and them finally Northern Europe, yet they continue to talk their books. I'm really glad I don't own any European bonds right now or work with people who are dumb enough to do so. I'm also glad not to be downwind of whatever they're smoking.
Here's a hearty shout-out to my legion of new fans from concert halls and recital rooms across the nation. I'll have a lot more to say about alternatives to union strikes very soon. In the meantime, you musically-inclined folks need to go watch some old newsreels of labor unrest in the 1920s and '30s, just to know how lucky you are today.
Tuesday, December 25, 2012
Tembo Gold Corp. (TBGPF) Explores In Africa
Tembo Gold Corp. (TBGPF / TEM.V) is digging up Africa, specifically Tanzania. That country is ranked 102 out of 174 on Transparency International's Corruption Perceptions Index for 2012, with an absolute score of 35 out of 100. Tanzania also ranks 110 out of 179 on the Heritage Foundation Index of Economic Freedom for 2012, with an absolute score of 57. This translates into a huge political risk that investors must bear in mind.
The CEO is a geologist with a long history of operating in Tanzania. Good news. He'll need that local knowledge given the high level of corruption and low level of freedom there. I'll give the rest of the team good marks for knowing stuff about mining.
Their Tembo property may have promise. I think they did something brilliant by overlaying plotted artisanal mine activity onto their aerial magnetic survey results. Tembo's 43-101 report from July 2012 does not reveal any MII resources but does recommend a $12M follow-up exploration program. I wonder how they're going to fund this next phase.
Tembo Gold's financial statements for June 30, 2012 show C$426k in cash on hand, plus C$4.6M in short-term investments. The notes to their financial statements do not reveal any encumbrances tied to those investments, so I will consider that as part of a total cash reserve of C$5M. Their burn rate is about C$520k/month (averaging their three-month and six-month net losses), and they closed a financing round for C$4M in November. This gives them enough cash to survive until the end of December 2013. It is difficult to determine how much of this raised cash will be devoted to their follow-up exploration.
Some of Tembo's drill samples show some incredibly high grades but that's not enough to entice me to invest. Let's see some 2P reserves first. Oh, BTW, Tembo should hope the Tanzanian economy becomes more transparent.
Full disclosure: No position in Tembo Gold Corp. at this time.
The CEO is a geologist with a long history of operating in Tanzania. Good news. He'll need that local knowledge given the high level of corruption and low level of freedom there. I'll give the rest of the team good marks for knowing stuff about mining.
Their Tembo property may have promise. I think they did something brilliant by overlaying plotted artisanal mine activity onto their aerial magnetic survey results. Tembo's 43-101 report from July 2012 does not reveal any MII resources but does recommend a $12M follow-up exploration program. I wonder how they're going to fund this next phase.
Tembo Gold's financial statements for June 30, 2012 show C$426k in cash on hand, plus C$4.6M in short-term investments. The notes to their financial statements do not reveal any encumbrances tied to those investments, so I will consider that as part of a total cash reserve of C$5M. Their burn rate is about C$520k/month (averaging their three-month and six-month net losses), and they closed a financing round for C$4M in November. This gives them enough cash to survive until the end of December 2013. It is difficult to determine how much of this raised cash will be devoted to their follow-up exploration.
Some of Tembo's drill samples show some incredibly high grades but that's not enough to entice me to invest. Let's see some 2P reserves first. Oh, BTW, Tembo should hope the Tanzanian economy becomes more transparent.
Full disclosure: No position in Tembo Gold Corp. at this time.
Saturday, December 22, 2012
Mkango Resources (MKA.V) And Rare Earths
Mkango Resources (MKA.V) is chasing one of my favorite things - rare earth elements. Their CEO has an analyst and transactional background in the mining sector but is not a geologist or miner himself. Uh-oh, that's not good for a junior explorer. The non-executive director with the professional background at Randgold was there long enough to take it from exploration into full production. That is invaluable experience but the team needs more people like that.
Their Songwe project in Malawi has a 43-101 report. Good for them but I would like to see a final report with 2P reserves. Photos of the site show a scratched-out dirt road but it's unclear whether it connects to the nation's larger transportation network. They need C$1.6M to complete the next phase of drilling, modeling, and economic estimation.
It's hard to tell whether they have the financial strength to move forward with that plan. The most recent financial statement they show on their website was for a company previously named "Alloy Capital." Searching SEDAR reveals interim financial statements for Mkango dated September 30, 2012. These statements reveal C$645k in cash on hand at the end of September, and with a burn rate of over C$100k/month they'll run out of cash by March 2013 unless they raise capital. Shareholders can thus expect serious dilution unless Mkango is willing to option out part of the 100% ownership of its Songwe property.
Management deserves kudos for keeping expectations realistic, and I'm not about to compare them to Mountain Pass until they have a firmer understanding of their ores. Since they only have one key leader who has gone all the way to production, they don't have the bench strength to go it alone in this corner of the world. The driver of Mkango's future valuation will be the quality of whichever strategic partner they bring in prior to a production decision. That uncertainty, plus the lack of clarity for their financial health, makes them too risky for me.
Full disclosure: No position in MKA.V at this time.
Their Songwe project in Malawi has a 43-101 report. Good for them but I would like to see a final report with 2P reserves. Photos of the site show a scratched-out dirt road but it's unclear whether it connects to the nation's larger transportation network. They need C$1.6M to complete the next phase of drilling, modeling, and economic estimation.
It's hard to tell whether they have the financial strength to move forward with that plan. The most recent financial statement they show on their website was for a company previously named "Alloy Capital." Searching SEDAR reveals interim financial statements for Mkango dated September 30, 2012. These statements reveal C$645k in cash on hand at the end of September, and with a burn rate of over C$100k/month they'll run out of cash by March 2013 unless they raise capital. Shareholders can thus expect serious dilution unless Mkango is willing to option out part of the 100% ownership of its Songwe property.
Management deserves kudos for keeping expectations realistic, and I'm not about to compare them to Mountain Pass until they have a firmer understanding of their ores. Since they only have one key leader who has gone all the way to production, they don't have the bench strength to go it alone in this corner of the world. The driver of Mkango's future valuation will be the quality of whichever strategic partner they bring in prior to a production decision. That uncertainty, plus the lack of clarity for their financial health, makes them too risky for me.
Full disclosure: No position in MKA.V at this time.
Thursday, December 22, 2011
South Boulder Mines (SBMSY) And Eritrean Exploration For Potash
South Boulder Mines trades as STB in Australia, and SBMSY here in U.S. markets. The company does have other mining projects in Australia but one newer project is worth a discussion. They think they've found a bunch of potash in Eritrea and want to try their luck bringing it into production. How hard can it be?
The good news is that potash deposits have fairly uniform geology, unlike metal deposits that form in veins and require more precise estimations of grade and depth. That makes for a straightforward estimate of the mine's layout and required capex. They have considered requirements for new roads and port facilities in advance and have budgeted to build them from scratch. The potash site is below sea level, so pumping water to the site from the coast is feasible in energy terms. I am curious as to whether the seawater would have to be desalinated or otherwise treated prior to use in a potash mine; there is precedence for using treated waste water. Saltwater from oil drilling is apparently also useful in the hunt for potash, so maybe seawater isn't a worry at all.
The bad news is all about Eritrea. The U.S. State Department has a good summary of Eritrea's political situation. Eritrea's willingness to defray the company's capex costs is nice but the government's requirements for free carry, an option to buy a 30% stake after the bankable feasibility study, a 3.5% royalty, and a corporate tax rate of 38% all add up to a serious bite before the common shareholder will see a penny of net earnings. The government completely controls the economy, prohibits civil liberties, and has not held free elections. That should give foreign investors pause in considering how safe their investments will be. Transparency International rated Eritrea as 2.5 in its Corruption Perceptions Index in 2011 (that's pretty bad). The Heritage Foundations' Index of Economic Freedom ranks Eritrea's economy in 2011 as one of the least free in the world. The U.S. government is also sufficiently concerned about Eritrea's support for Al Shabaab, an Al Qaeda-inspired radical Islamist terrorist group, that it advocated international sanctions against Eritrea earlier this year. The UN enacted those sanctions and recently made them stronger.
Read that State Department political summary again for an interesting fact. Eritrea's GDP was only $1.87B in 2009. South Boulder Mines estimates revenue from this project of $6B over 17 years, or roughly $353M/yr. That's almost 19% of Eritrea's total GDP, from a single project. A country as corrupt and poor as Eritrea would be sorely tempted to nationalize a lucrative mining project. I have no idea whether the Eritreans would actually do such a thing, but they don't seem to have much respect for the law or international norms of behavior.
The company owns a legacy nickel property and plans to spin it off. Why not sell it to raise the money they'll need for capex at the potash site? That would make the rest of the raise easier. It would also be easier to raise capital with working interests rather than share issuance, as the Eritrean government's potential equity stake could massively dilute shareholders. Working interests, if creatively structured, can let revenue flow to strategic investors before the Eritrean government collects its onerous taxes.
In any Western country, a potash play this large and shallow would be a more straightforward financial decision. Its location in a country with a questionable political structure should make investors think carefully.
Full disclosure: No position in STB / SBMSY at this time.
The good news is that potash deposits have fairly uniform geology, unlike metal deposits that form in veins and require more precise estimations of grade and depth. That makes for a straightforward estimate of the mine's layout and required capex. They have considered requirements for new roads and port facilities in advance and have budgeted to build them from scratch. The potash site is below sea level, so pumping water to the site from the coast is feasible in energy terms. I am curious as to whether the seawater would have to be desalinated or otherwise treated prior to use in a potash mine; there is precedence for using treated waste water. Saltwater from oil drilling is apparently also useful in the hunt for potash, so maybe seawater isn't a worry at all.
The bad news is all about Eritrea. The U.S. State Department has a good summary of Eritrea's political situation. Eritrea's willingness to defray the company's capex costs is nice but the government's requirements for free carry, an option to buy a 30% stake after the bankable feasibility study, a 3.5% royalty, and a corporate tax rate of 38% all add up to a serious bite before the common shareholder will see a penny of net earnings. The government completely controls the economy, prohibits civil liberties, and has not held free elections. That should give foreign investors pause in considering how safe their investments will be. Transparency International rated Eritrea as 2.5 in its Corruption Perceptions Index in 2011 (that's pretty bad). The Heritage Foundations' Index of Economic Freedom ranks Eritrea's economy in 2011 as one of the least free in the world. The U.S. government is also sufficiently concerned about Eritrea's support for Al Shabaab, an Al Qaeda-inspired radical Islamist terrorist group, that it advocated international sanctions against Eritrea earlier this year. The UN enacted those sanctions and recently made them stronger.
Read that State Department political summary again for an interesting fact. Eritrea's GDP was only $1.87B in 2009. South Boulder Mines estimates revenue from this project of $6B over 17 years, or roughly $353M/yr. That's almost 19% of Eritrea's total GDP, from a single project. A country as corrupt and poor as Eritrea would be sorely tempted to nationalize a lucrative mining project. I have no idea whether the Eritreans would actually do such a thing, but they don't seem to have much respect for the law or international norms of behavior.
The company owns a legacy nickel property and plans to spin it off. Why not sell it to raise the money they'll need for capex at the potash site? That would make the rest of the raise easier. It would also be easier to raise capital with working interests rather than share issuance, as the Eritrean government's potential equity stake could massively dilute shareholders. Working interests, if creatively structured, can let revenue flow to strategic investors before the Eritrean government collects its onerous taxes.
In any Western country, a potash play this large and shallow would be a more straightforward financial decision. Its location in a country with a questionable political structure should make investors think carefully.
Full disclosure: No position in STB / SBMSY at this time.
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